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July 15, 2013 at 01:19 PM
After a sudden resignation last fall, Alan Goldfarb, the former chairman of the Board of Directors of the CFP Board, has been found to have violated the CFP Board’s Rules of Conduct.
The CFP Board said he failed to properly disclose his compensation, after he claimed on FPA’s PlannerSearch that he was “fee-only” and later “salaried” when in reality a “related party” was eligible to receive commissions from Goldfarb’s clients. As a result, the CFP Board’s Ad Hoc Disciplinary and Ethics Commission that investigated the matter has issued a public Letter of Admonition for Goldfarb’s conduct.
Yet the details of the case suggest that the matter was not as clear as the initially reported findings suggested; Goldfarb’s ties to the “related” broker-dealer were through a parent accounting firm that owned both his RIA and the broker-dealer, and Goldfarb himself held only a small 1% equity interest in the firm and was otherwise not compensated.
Even NAPFA guidelines dictate that less-than-2% interests are de minimis, yet the CFP Board declared that because of these related interests Goldfarb should not have labeled himself as “fee only” even though all of his clients in reality only ever did in fact pay him fees through his own RIA.
At a higher level, though, the real issue in the Goldfarb case is that such a strict interpretation of what does and doesn’t constitute “fee only” could cause even many large and well-known RIAs to “fail” the test, renders the definition of “salary” almost moot, and is a problematic reminder of how opaque the CFP Board’s adjudication process can sometimes be due to its privacy obligations as a private entity.
In addition, taking such an extreme position regarding “fee only” will arguably result in so many financial planners being classified as receiving both commissions and fees — regardless of whether the commissions constitute 0.1% or 99.9% of total compensation — as to render the disclosure relatively useless as a consumer protection. Furthermore, the Goldfarb result also leaves us unclear about where to draw the lines on what constitutes “trivial” or immaterial compensation conflicts, related parties, overlapping ownership of holding company subsidiaries, and complex real-world arrangements that could unwittingly render advisors on the wrong side of the line.
In the end, a strict interpretation of the Goldfarb conclusions about what constitutes “salary” and “fee only” could mean that thousands of current CFP certificants are not complying properly with the rules, and that many need to update their information immediately! But perhaps ultimately, the best outcome for this whole situation is to hope that it can serve as a catalyst for better clarification on the rules for compensation, and an improvement in the transparency of CFP Board’s enforcement process to allow clearer (and better?) precedents to be set for the future. The Facts on Goldfarb
According to the CFP Board’s Ad Hoc Disciplinary and Ethics Commission (formed to investigate the matter separate from the standard Disciplinary and Ethics Commission members to avoid any conflicts of interest, given Goldfarb’s history and leadership with the organization), Goldfarb misrepresented his compensation by claiming he was “fee only,” later revised (when his fee-only status was questioned) to a claim of compensation via “salary,” when disclosing his method of compensation on FPA’s PlannerSearch website.
At issue was the fact that the accounting firm that owned Goldfarb’s RIA also owned a broker-dealer subsidiary, for which Goldfarb had some form of employment relationship and in which he also held an ownership interest. As a result, the CFP Board concluded that Goldfarb “and related parties” (i.e., Goldfarb’s employer, the accounting firm, and his partial ownership of the broker-dealer) could potentially receive a commission related to Goldfarb’s clients, and that as a result he was not “fee-only” as stated (and that because Goldfarb and/or his firm received fees paid by his clients, his compensation was not “salary,” either). Given these conclusions, the CFP Board issued a public letter of admonition to Goldfarb for failing to properly disclose his compensation.
Of his own volition, Goldfarb has subsequently provided further detail regarding the nature of the arrangements at issue in the case, with several important distinctions, including:
— Goldfarb’s financial interest was a mere 1% equity ownership in the accounting firm’s broker-dealer and insurance agency subsidiaries, in exchange for Goldfarb serving nominally as president (as the only person in his firm with a securities principal’s license) in a purely oversight function. He was not otherwise compensated for his role beyond his small ownership interest.
— All actual billing activity for Goldfarb’s clients was done through Goldfarb’s RIA, Weaver Wealth Management, and all clients were charged only hourly, project-based, or assets-under-management fees. At no point did any of Goldfarb’s clients actually implement any products or solutions with the broker-dealer, nor did any of them ever actually pay any commissions at all.
— The relationships between Goldfarb and his RIA and these other businesses were fully disclosed in his Form ADV materials; they were not disclosed on the FPA website, due to the simple fact that the FPA’s website had no space to allow further explanation of such details. But all clients received full disclosure of all these relationships before doing any business with Goldfarb.
Thus, from Goldfarb’s perspective, he contends that because his broker-dealer relationship was minimal and non-compensating beyond a de minimis ownership stake, and that all of his clients only actually paid fees of various forms, that all of his other business relationships were disclosed in his firm’s own materials, and/or that if the CFP Board intended to criticize his compensation disclosures even though no clients ever actually paid a commission for anything, that it should have been done with a private caution and not a form of public discipline. Categories of Compensation
Ultimately, what’s really notable about the Goldfarb case is not just the facts and conclusion of the case itself, but the reasoning that the CFP Board used in coming to its conclusions, and the potentially broad and significant implications that it has for any/all other financial planning practitioners.
